Greylisting - Impact on SA's Enhanced Due Diligence Compliance Obligations

December 5, 2022 by Sam Strand

After the FATF released its mutual evaluation report on South Africa’s AML/CFT legislation one year ago, the country has failed to sufficiently address the FATF’s concerns. As a result, South Africa now risks being greylisted by the FATF – a decision that has the potential to greatly affect how financial institutions across the world are obligated to conduct business in the country. 

What is the FATF

The Financial Action Task Force is a leading intergovernmental organization founded to develop policies to combat money laundering. These policies are known as the FATF 40 Recommendations and are widely regarded as the global standard for anti-money laundering policy. 

South Africa has been a FATF member since 2003. Recently, in October 2021, the FATF released its Mutual Evaluation Report. The report evaluated South Africa’s AML/CFT practices, analyzed South Africa’s compliance with the FATF 40 Recommendations, criticized shortcomings and inconstancies, and provided valuable recommendations regarding how the country’s current systems can be strengthened. 

What is Greylisting?

When a country is greylisted by the FATF, that country is subjected to increased monitoring of its anti-money laundering and countering the financing of terrorism system. This is done to account for the increased risk of money laundering posed by that country, most often due to notable deficiencies in the design and/or application of its AML/CFT regulatory framework

The FATF describes increased monitoring and greylisting as the following: 

“Jurisdictions under increased monitoring are actively working with the FATF to address strategic deficiencies in their regimes to counter money laundering, terrorist financing, and proliferation financing. When the FATF places a jurisdiction under increased monitoring, it means the country has committed to resolve swiftly the identified strategic deficiencies within agreed timeframes and is subject to increased monitoring. This list is often externally referred to as the greylist.” – FATF.

The FATF maintains a list of countries that are greylisted, which can be found here. Should South Africa be placed on this list, the country will appear alongside other greylisted jurisdictions that include Syria, Cambodia, Mali, South Sudan and Yemen. As a comparatively strong African economy with a mature financial system, South Africa will be an abnormal candidate for a greylisted status. 

Why South Africa Might be Greylisted 

As a global watchdog for money laundering and the financing of terrorism, the FATF routinely assesses the AML/CFT policies of countries around the world. Countries periodically undergo enhanced assessments conducted by the FATF, after which the FATF releases a Mutual Evaluation Report (MER) that covers the findings and recommendations for the AML/CFT legislation of a particular jurisdiction, such as South Africa. 

One year ago, the FATF released its MER on South Africa. This MER report assessed South Africa’s AML/CFT legislation and highlighted several key deficiencies that needed to be urgently addressed in order for South Africa to avoid being greylisted. The majority of these shortcomings and strategic deficiencies were related to the State Capture saga that saw institutionalized corruption severely undermine South Africa’s criminal justice system and cripple the economy. 

The FATF gave South Africa one year in which to demonstrate that the country was making a concerted effort to address these deficiencies, during which time the FATF placed South Africa under increased monitoring to assess its progress. 

Now, more than one year after the start of the period of increased monitoring, South Africa has largely failed to show the FATF that it has taken the recommendations seriously and made concerted efforts to address the dire shortcomings in its AML/CFT system. 

As a result, analysts predict that there is an 85% chance that the FATF will greylist South Africa near the start of 2023. 

Impact of Greylisting on Businesses and Financial Institutions 

Intellidex has released a report evaluating South Africa’s chances of being greylisted and the potential fallout from such an outcome. As noted by Intellidex, one of the most significant effects of South Africa being greylisted will be increased transactional costs associated with requirements for greater due diligence. 

“The primary economic impact will arise from increased transaction costs related to enhanced due diligence applied to most South Africans’ client relationships with foreign service providers. This will increase the cost of capital and generally reduce overall foreign investment in South Africa. There will also be greater costs in the primary issuance of debt and equity particularly to international investors stemming from reputational effects and due diligence costs by book builders.” – Intellidex. 

The new requirements for enhanced due diligence will most badly affect South African banks, who will be obligated to report on AML/CFT risks on an annual basis instead of every three years, while senior management will have to directly report to clients. These costs will be felt most badly by South African businesses and individuals that trade internationally and have bank accounts or investment accounts abroad. Costs will increase particularly for South African banks concerning the management of correspondence, banking relationships and relationships with global infrastructure providers such as payment systems. 

Furthermore, according to Intellidex, capital markets will not be significantly affected in the short run as there are no automatic reactions to a greylisted status and operators are already cognisant of the risks associated with South Africa. However, ESG funds that use greylisting as a proxy for governance will likely down-weigh South African exposure.  

Impact of Greylisting on South Africa’s Economy 

The heightened requirements for due diligence have the potential to severely undermine and stifle South African economic growth. For instance, heightened transactional costs may lead to a withdrawal of some businesses from South Africa due to declining profitability caused by increased transactional costs. 

Furthermore, some institutions may choose to de-risk their portfolios by terminating business with South African clients, as well as opting to not start any new business dealings within South Africa or with South African clients. 

Effects such as these have the potential to severely undermine South Africa’s economic growth. 

At its worst, greylisting could wipe out up to 3% of SA’s GDP; in the best-case scenario, these estimates are less than 1% of GDP.  

Nonetheless, the FATF has yet to announce its decision as to whether or not South Africa will be greylisted. Even if South Africa is greylisted, the severity of the greylisting will depend on how seriously South Africa addressed the FATF’s concerns – a serious investment of political, social and economic capital into addressing the FATF’s concerns can mean that SA’s period of being greylisted will be short-lived, whereas perceived inactivity will heighten the losses associated with a greylisted status. 

Accordingly, should South Africa be greylisted, the exact effects of such a decision remain to be seen and depend on South Africa’s commitment to addressing the FATF’s concerns as quickly and comprehensively as possible. 

AML/CFT Compliance Solutions for South Africa 

Although there are universally recognized guidelines for AML/CFT regulations, every country typically has their own set of regulatory requirements that govern how businesses, institutions and organizations in that specific country must conduct business with their customers. 

When doing business in a country and ensuring compliance with its complex financial regulations, it is important to employ experts in the relevant country who are best equipped to operate within the nexus of legislation, law enforcement and economic realities while delivering high-quality and cost-effective services.  

Enhanced Due Diligence, Risk Assessment and Identity Verification Services for South Africa 

As South Africa’s leading provider of world-class due diligence and remote-onboarding solutions, ThisIsMe is proud to be at the forefront of a trust-based and privacy-compliant digital world. To experience our full suite of advanced due diligence services, book a demonstration by contacting our team here